Good morning, ladies and gentlemen. Welcome to the TELUS International Third Quarter 2022 Investor Call. My name is Jonathan. I will be your conference facilitator today. At this time, all lines have been placed on mute to avoid background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions]. As a reminder, today's program is being recorded. I would now like to introduce Jason Mayr, Senior Director, Investor Relations and TELUS, Treasurer International. Mr. Mayr, you may begin your call.

Thank you, Jonathan. Good morning, everyone. Thank you for joining us today for TELUS International’s Q3 2022 investor call. Hosting our call today are Jeff Puritt, President and Chief Executive Officer; and Vanessa Kanu, our Chief Financial Officer. As usual, we'll begin with some prepared remarks where Jeff will provide an operational and strategic overview of the quarter, followed by Vanessa, who will provide some key financial highlights. We'll then open the line to questions from prequalified analysts before turning the call back to Jeff for closing remarks. Before we begin, I'd like to direct your attention to Slide 2 of the supplementary presentation available for download on this webcast and also available on our website at telusinternational.com/investor. The statements made during this call may be forward-looking in nature, including all comments reflecting expectations, assumptions or beliefs about future events, or performance that do not relate solely to historical periods. These forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from our current projections. We assume no obligation to update any forward-looking statements. Jeff and Vanessa will also discuss certain non-GAAP measures that the management team consider to be useful in assessing our company's underlying business performance. An explanation of these non-GAAP measures and a reconciliation to the comparable GAAP measures can be found in the appendices of today's supplementary presentation, along with the earnings news release issued this morning and regulatory filings available on SEDAR and EDGAR. I would also like to remind everyone that all financial measures we are referencing on this call and in our disclosure are in U.S. dollars unless specified otherwise, and relate only to TELUS International results and measures. With that, I'll now pass the call over to our President and CEO, Jeff Puritt.

Thank you, Jason. Good morning, everyone, and thank you for joining us today. It's my pleasure to be speaking with you today along with Vanessa live from our TELUS International El Salvador site. We are here to join more than 1,000 TI key members, clients and other local stakeholders at our TELUS International Days of Giving volunteer event. Together, we are kicking off a massive rebuilding project to restore a child development center run by the global non-profit organization SOS Children's Village. This is on the heels of a terrific event in Guatemala City just a few days ago, where our team finished building a school, our 12th in Guatemala that will benefit more than 2,000 students. I'll use this opportunity to once again thank our team members for their passion, dedication and hard work in organizing these meaningful and vital events in the regions where we operate. Now moving on to our financial and operating results reported earlier this morning. For the third quarter of 2022, TELUS International delivered an 11% year-over-year increase in revenue or 16% on a constant currency basis, a solid result given the prolonged geopolitical uncertainties and macroeconomic challenges we continue to operate within. With the potential global recession looming, our attention and efforts have remained on the factors within our business that we can control. In this regard, our team's ongoing diligence in harvesting efficiencies and productivity in our operations helped to deliver strong double-digit profitability growth in Q3 with adjusted EBITDA up 15% year-over-year, and an adjusted EBITDA margin up 25.7%. Moreover, TI has continued to successfully deliver robust free cash flow up 56% year-over-year, enabling our continued rapid deleveraging. As we've shared in past quarters, TI partners with more than 600 clients globally, including many tech forward enterprises, and digital disruptors. We've…

Thank you, Jeff, and good morning, everyone. Thank you all for joining us today. As usual, in my review of financial results, I will refer to some items that are non-GAAP measures. For descriptions and a reconciliation of our GAAP to non-GAAP measures, please see our earnings release and regulatory filings from earlier this morning. Now let me expand upon the components of our financial performance for the quarter. In the third quarter, we delivered revenue of $615 million, up 11% year-over-year on a reported basis and 16% on a constant currency basis, despite a challenging macroeconomic environment that has impacted the velocity of spend for some of our larger clients, who, as Jeff mentioned earlier, are approaching short-term spending decisions with more caution due to cooling demand in their own end customer markets. We can see this impacting many areas of the global economy with heightened uncertainty driving market volatility and near-term budget adjustments as negative headlines exacerbate fears of recession. In spite of all of this, TELUS International has stayed true to its strategy of focusing on profitable growth, robust free cash flow generation and rapid deleveraging, all of which were successfully achieved during the third quarter and will continue to be of critical importance during challenging macroeconomic periods. Looking more closely at our revenue performance across industry verticals and geographies, our reported growth rates were negatively impacted by the weaker euro to U.S. dollar, as previously mentioned. The overall impact to our top-line growth was an unfavorable 500 basis points. As I speak to our vertical and geographic revenue performance, I will provide constant currency commentary where helpful. Starting with revenues by vertical. In the third quarter, our largest vertical, tech and games, grew 15% year-over-year on a reported basis. On a constant currency basis, this vertical…

[Operator Instructions] And our first question comes from the line of Ramsey El-Assal from Barclays.

It feels like a very uneven demand environment across your verticals with pretty localized weakness, I guess, in e-commerce and fintech. I guess, can you provide some more color on sort of what's going on in that sector? And whether you feel good that some of the diversity, diversification in your business might shield you from similar trends evolving in these other verticals?

Yeah, I think you're spot on. I think there is a high degree of heterogeneity within that e-commerce and fintech vertical for us. Some of those clients are crypto-centric businesses. And I think you've seen and heard from others that that sector has been candidly ravaged. And as a consequence, it's had an adverse impact, in part on us. Thankfully, we didn't have significant exposure there, but not meaningless. Conversely, we continue to support a fairly robust, and as I say, heterogeneous mix of e-commerce fintech providers. And in totality, we're cautiously optimistic that we're going to continue to see meaningful growth, as Vanessa shared, I think on a constant currency basis, still growth in that group, not where it had been historically, but in the fullness of time, we continue to be optimistic. And thankfully, we're not, as I said, over-exposed to the crypto subsector, if you will.

And our next question comes from the line of Tien-Tsin Huang from J.P. Morgan.

I wanted to maybe ask you to elaborate on the cost containment that you're doing right now. Can you give us a little bit more detail or examples of that? And how much more can you do in the event that some of the volumes start to slow even more than you're anticipating now?

Tien-Tsin, I'll take your question, and maybe, Jeff, feel free to top up. So Tien-Tsin, we're not really doing anything unusual here from a cost containment perspective. I think you and hopefully the rest of the audience recognize that TELUS International has always been very focused on ensuring that the cost profile was highly aligned to the revenue growth profile. And we've always had pretty strong operating leverage within our financial model. As we've been looking at how Q3 has unfolded, as Jeff mentioned earlier, we've always engaged in joint forecasting with these clients. And as we did our forecast with these clients, last quarter, it was on the strength of those forecasts and the historical accuracy of those forecasts that we put our guidance together. As the quarter unfolded and we started to see signs of softness within those clients themselves, and we started to see that in our own business clearly, that meant that we needed to look at our cost profile and with a particular focus around third-party spending. In terms of internal team member counts, you may have heard me say in my prepared remarks, we're not reducing our internal team member counts. However, the pace of hiring, we have realigned to meet what we think are now the expected growth profile for at least the near-term. So not cutting back on internal headcount per se or team member count, but certainly, looking at the pace of hires to ensure that we're not aggressively hiring relative to the current market environment. And then the rest of the cost containment is really around third-party spend. We're negotiating third-party contracts and ensuring that we're seeing efficiencies within that third-party cost bucket.

The only thing I'd add, Tien-Tsin, is on the offset, if you will, focusing on securing price increases as pervasively as possible to provide us with the additional headroom we need in order to try and continue to balance the business. As we've discussed many times, I think you'll recall during our IPO roadshow, you and I specifically talked about that offset, the potential toggle of revenue growth versus profitability. And I said then and would continue to believe now that of the two, I want to be focused on profitable growth, not just growth for the sake of growth. And so in this particularly pressurized environment, staying disciplined in that regard, I think is continuing to serve us well. And as long as we continue to remain in the double-digit top-line revenue growth zip code, which we are, 16% on a constant currency basis, and continue to deliver meaningful profitable growth, again, 16% EBITDA growth, I feel like we are appropriately managing those somewhat competing considerations on occasion as we weather through what I anticipate will be three, six, perhaps nine months of continued challenge.

And our next question comes from the line of Stephanie Price from CIBC.

I hope we can talk a little bit about the mix of growth between new wins versus existing customer expansion. Just wondering if it's changed at all given the current environment here?

Stephanie, it's Vanessa here. I'll start, and Jeff, please feel free to top up. The mix of new versus existing, I wouldn't suggest has changed meaningfully in terms of the recognized revenue in the quarter. I think -- so as you kind of look at the -- as you look at our overall revenue profile, about 10% of the revenue in any given quarter will be new client contribution, so to speak. That tends to take a couple of quarters to really ramp up. So in the immediate quarter, the revenue contribution doesn't tend to be as meaningful, but it is over the course of time as those new clients tend to build up and ramp up over time. So I don't think the profile is that different when you look at the recognized revenue. In terms of new wins, I think going back to Jeff's earlier points, we are seeing sort of a longer sales cycle. So the funnel continues to be very, very robust. And that's the funnel of not only growth from existing clients, but also growth from new clients. That's a robust funnel, but particularly as it pertains to new clients, we are seeing elongated sales cycles and longer decision timeframe. And that's frankly, partly what was reflected in the outlook that we put together this morning.

And our next question comes from the line of Divya Goyal from Scotiabank.

Just talking about the client demand, I wanted to understand what's the impact on the client demand, more so on the legacy business like the [BPO CX] business or did you see a material impact on the digital side as well? And adding to that, how do you -- I know you don't provide guidance for fiscal 2023 yet, but how do you expect -- or how should we anticipate that cycle over the next few quarters?

So maybe I'll take the first half, Divya, and Vanessa, can speak to the second half. I'm not sure that I can discern any meaningful difference between the timeliness, the slowdown, the overall demand dynamic between our DCX and digital IT, both continue to be reasonably strong. I think the real challenge for us has been the slowdown in decision-making. So by way of specific example, we generally are seeing either net new or growth through existing opportunities that would come to our attention through either RFP or direct bid opportunities. We'd enter into negotiations discussions and a decision would be taken by the client. And we'd be off to the races between three, six, nine months. And on renewals, considerably less than that, again, across both DCX and digital IT. What we've been seeing now over the last couple of months has been continued discussion and opportunities around demand. So we're not seeing a lessening in the overall size of our funnel, but customers seem to be taking a lot longer to pull the trigger on finally saying, okay, let's get going and signing off on the statement of work and/or a new master services agreement. So this is what is, I guess, tempering our enthusiasm in the near-term, but continuing to provide us confidence in the longer term because no one is saying we simply don't see a path to continuing with this plan, project transformation or otherwise. What we're seeing is, we need to slow things down because of the uncertainty of what's going to happen with our own customer-consumer demand in the near-term. And so we just want to proceed a little bit more cautiously. In terms of the '23 outlook, I'll leave that to my colleague.

So we're not providing 2023 guidance this morning. But I think we can all agree that if you even think about sort of estimations of GDP growth rates are lower today than they were even say, six months ago or frankly even three months ago. And I think we can also probably agree that the headwinds, the macro headwinds that we're all talking about not just this morning, but for the last several weeks, are probably not going to end after this earnings call ends today. So I think based on that, while we're not giving 2023 guidance, we could probably assume that the macro softness we have today is probably going to continue for a little while longer. But consistent with our past practice, we will provide guidance for 2023 concurrence with our Q4 results, which will be in early February.

And our next question comes from the line of Jesse Wilson from William Blair.

This is Jesse on for Maggie. So Jeff, you provided some examples of clear cost saving solutions and intelligent automation in the AI data solutions offering as well. Are you seeing longer sales cycles even for these types of work?

Yes. I mean, just it feels like everybody is moving with a degree of caution right now just because of the continued uncertainty. I think the looming recession is a euphemistic expression I keep hearing and I think others are recognizing, suggesting it's not looming any longer, it's here. And as a consequence, folks are just being a lot more cautious, taking a lot longer in terms of their own diligence to validate that they really need to move forward with these expenditures at this particular juncture. And as I said just a moment ago in response to Divya's question, it's not like I'm hearing anyone say we are just back-burnering this project. The need for this particular project or evolution in our own capability to better serve our clients and do more with less. They're just taking longer to get on with it, which is, as you can imagine, it's frustrating, disappointing, but we obviously want to continue to be ready to go and engaging with these clients on a regular basis so that when they're finally comfortable to move, we're right there.

And our next question comes from the line of Keith Bachman from BMO.

Jeff, I wanted to ask you about the kind of sensitivity of the economy, and I'll phrase it in a context of -- I think you said Europe constant currency was -- growth was much lower. It sounded like 4%, but I may have missed that number. Regardless Europe, economy is worse in the U.S. and your growth there is worse than the weighted average. And I'm just trying to understand how we should be thinking about as the U.S. seems to be tilting as you just said into the recession. How we should be thinking about the economic sensitivity? You actually produced what I thought was a pretty good quarter here all around, but is the U.S., in particular, growth weakens and perhaps the rest of the world. I'm just trying to tie that with the growth that you're seeing now in Europe, which is significantly lower than what you're experiencing here in Asia. How we should be trying to tie all those threads together to think about the risk, so to speak, in 2023?

Good question. It feels to me, to us right now, that there is obviously a bifurcated experience between Europe and North America, as reflected in the results we just shared. Our outlook for balance of year anticipate sort of a continuation across that trend line. To Vanessa's point, we're not yet in a position to offer guidance for 2023 as much as I'm inclined to want to try and say something about it. The best I'm allowed to offer is, I continue to be quite bullish on the local economy here in managing to deliver, to support our ability to deliver meaningful double-digit growth. I think in part, it's a consequence of where businesses seem to be in their own life cycle, in their own appetite to embrace digital transformation. I just -- I have seen and continue to see that our North American customers' perspective in existing are just further ahead in leveraging these capabilities at scale. And whilst certainly the recession and the fears of perhaps a deeper, broader one persists for now, I think there's a fairly pervasive recognition. The digital transformation is actually a potential panacea for that in part, really enabling businesses to do more with less. And I think historically, there was this perception that these were mutually exclusive outcomes. You either spend more in order to get more or you spend less and you got less. And what I think is so unique and special about digital transformation is you can actually spend less and get more. And just by way of specific example, some of the work that I highlighted in the case studies there. By leveraging a bought solution by deploying self-help and automation capabilities, you're actually spending less on the support and you're getting significantly improved outcomes, whether it's shorter time to serve and higher customer satisfaction, higher employee satisfaction scores. And I think our opportunity in North America continues to be a little bit more scaled and robust in the near-term. So I don't think even if the economy worsens in North America that all of a sudden our growth from that region goes to 4%. I think we stay in the double-digit zip code.

And our next question comes from the line of Dan Perlin from RBC.

I had a question about, I guess, really the overall cost structure in kind of the current environment and then maybe even the go-forward to the extent we're in a recession. So rather than kind of ask you questions about like where can you pull the toggles, my question is, are you in an environment where the rate of change of your input costs are probably going up faster than your ability to pass that through, like how long do you think you're going to be able to sustain a positive margin trajectory? And my sense is, and we've heard this from other companies, companies that have longer term contracts with CPI escalators, I mean, you can kind of push some costs through, but it seems like the near-term input costs are just so much greater?

I'll start, and Jeff, certainly you can top up. This has been the question that's been asked of TELUS International. It seems like forever and then it just keeps getting asked every quarter. But every quarter, our margins -- we demonstrated that we're actually able to maintain our margins. So I think we've sort of demonstrated this through actual experience and not just explanations. But really to come back to your question, we've -- you're right. So input costs are rising fast. We've spent a lot of time on prior calls talking about wage inflation specifically. Yes, there's obviously other forms of inflation, but in our case, wage inflation has been the biggest element, but we've successfully managed through the wage inflation. We've built that into our initial guidance of approximately 24%. And now you're seeing an increase in our profitability yield in the guidance of 24.4% to 24.6%. So I think it's been sustainable there, Keith. And we're approaching that across many different fronts. It's passing on the increased inflation to customers. But you're right, there's a limit to that. But we actually have had success in passing on increases to many of our customers, and you can see that reflected in our margin profile. But we also, which is something we've always historically done, managing for better efficiencies within our own business. And that's not necessarily new for TI. We've always had fairly strong operating leverage and we'll continue to do so prospectively. So as we look at overall cost profile management, we're not doing anything unsustainable. We're not -- there's a lot of headlines around companies out there reducing workforce by 5%, 10% and sometimes even greater amounts, but you're not going to see those kinds of headlines about TELUS International. That's not how we're sustaining our profitability, but we are making sure that we are being increasingly efficient, just given the challenges that you just mentioned. And I feel pretty good. I mean, to come out with a higher profitability yield in this kind of environment, I think speaks well for execution.

No, I agree, I thought the margin targets were quite impressive in the current environment. I was just trying to think about to the extent that that escalates against you.

So we feel pretty good about what we've put together for 2022. Clearly, I don't think I -- I don't -- I'm not inclined to speak beyond 2022 at this particular juncture until we give our formal guidance. But again, I think what we've done well in the past we'll continue to do well prospectively. And as inflation -- whether inflation starts to get better or worse, we'll again continue to make sure that we pass on whatever price increases we are able to. Again, we've seen success so far and we'll continue to do that prospectively and we'll continue to manage our cost structure in meaningful ways that are not essentially detrimental to the long-term growth trajectory of the organization.

And the one top up there, Dan, would be the continued improvement in the mix shift. As we continue to progress the proportion of our revenues that are derived from less labor-intensive delivery models, that creates headroom, that provides a bit of relief for us in terms of managing that inexorable wage inflation dynamic that all of we in the technology services sector are forced to deal with on a regular basis. I think it's a fair question, but I have to say, when I hear and read some of your peers continue to question our ability to sustain these margins when we've been doing so quarter in and quarter out, not just throughout our tenure as a public issuer, but as one will have seen in the three year historical, financials we've filed as part of our IPO. And although one wouldn't have had visibility to it, for every year of our existence prior thereto, it starts to weigh on me when folks continue to question our ability to manage this business at these margin levels for the longer term when not only have we demonstrated we're doing so, but the level we're at is best-in-class across our entire peer group.

And our next question comes from the line of Richard Tse from National Bank.

I had a question on WillowTree. How would you compare WillowTree to your other acquisitions? Would you say it's sort of easier or harder to integrate on your model relative to the other names? And I guess, on a related question, I'm just kind of curious like how many WillowTree-type companies are there out there in the market today?

Richard, good question. So on the latter one, I would suggest, there are no other targets out there like WillowTree. And as you might expect, we have been spending a great deal of time and effort in our corporate development function, evaluating potential candidates for quite some time. This transaction, I would suggest, is squarely within the crosshairs of what Vanessa and I have been talking about, frankly, since our IPO roadshow and even more so over the last year. This hopefully didn't come as a surprise to anybody in terms of the capabilities that WillowTree brings to TELUS International in providing us with expertise and scale, particularly around the design and build components of the design build delivery ecosystem in which we operate. In terms of the anticipated integration roadmap relative to other transactions, I don't want to be dismissive in terms of the complexity. I think integration is always where the rubber hits the road on making acquisitions accretive or not in delivering incremental shareholder value or not. And as Vanessa said, we've already spent a great deal of time and effort, first independently, based on available information. So mapping out how we think to best realize and leverage the synergy potential through the combination and then post execution of the agreement pre-closing, working as collaboratively as we can with the WillowTree leadership community, again, subject to limitations as a result of awaiting antitrust approval to get going here. But I think this one is going to be pretty darn exciting only because right at the headline, what attracted us to this business beyond the stellar revenue growth rate, profitability profile and scale was the people in that business, the cultural alignment. And I know sometimes folks in this industry, and by that I mean, financial services, financial…

And our next question comes from the line of Daniel Chan from TD Securities.

Another question on WillowTree. You had some exposure to the consumer goods segment, just given some of the examples you provided. Given the current macro backdrop, and we've seen some weakness in consumer retail, how did you get comfort around the exposure in your due diligence? And how did the macro dynamics impact how you thought about the timing to execute that deal?

Another good question. I think consumer goods is an exciting area of opportunity. And the challenges that that sector and others are having right now, as I mentioned, at least inferentially in my comments earlier, I think as they look to manage through these current challenging times, finding ways to leverage automation through technology and innovation is going to be a key component of their survival and success. So we believe there's going to continue to be an embracing of the capabilities that WillowTree has. And as I think you know, our sister organization TELUS Ag and Consumer Goods gives us some pretty meaningful visibility into opportunity for synergy realization. And as you might expect, as part of this early integration planning, my WillowTree colleagues are already speaking directly with my TELUS Ag and TELUS Health colleagues, for example, about areas of opportunity for collaboration. So obviously, we're mindful of these macro dynamics, but near-term and through the longer term, we think there's lots and lots of exciting opportunity to really exploit the WillowTree expertise and capabilities to help these clients continue to win.

Our final question for today comes from the line Ryan Potter from CIBC.

So the outlook implies a pretty wide range for 4Q, like I'm getting to about 7% to 16% constant currency growth. Are there any reasons behind this? Like has visibility reduced at all given the macro? Are you giving yourselves a buffer for the clients? And also, could you probably kind of discuss your overall budgeting and outlook formation process?

Ryan, I noticed that they suggested you're from CIBC, but we know that you are from Citi. I know who are. But absolutely, so we do have a range. Clearly, I think we are in some fairly uncertain times. So the range is really just reflecting the level of uncertainty. But I know very well that you guys since you typically converge around the midpoint of the range, but we do know that there is a level of uncertainty. I mean, FX continues to be very, very volatile, just as one example. Every quarter, we adjust down the FX and it just gets worse. So that's just one example of the volatility, not to mention some of our very large technology clients who continue to be under some of their own earnings pressures. So for those reasons, we've given ourselves a bit of cushion there in the implied Q4 guide. That being said, it's still a fairly healthy year-over-year growth from a constant currency perspective and from a full year basis. Again, not just looking at Q4 specifically, but looking at the full year, again, that puts us firmly in the 16% to 18% constant currency revenue growth, which, again, we think is a fairly impressive number given the times that we're in, especially when you think about the margin profile that goes along with it. In terms of budgeting and what's informing sort of our forward thinking on that, I guess, similar to Divya's question earlier, more to come there. We are clearly at this point in time in our budgeting cycle as are many of our clients. But as Jeff mentioned earlier, we -- there's two things. There's what's happening in the near-term right now. And then there's, frankly, the long-term growth trajectory of the organization and also the long-term growth trajectory of the segments that we serve and the verticals that we serve. So we are continuing to be bullish on a long-term basis. And that's really what we want to make sure that we -- that's the parting message. I really don't think that we're going to see a pulling back on a long-term basis of what we've seen historically in terms of growth in concept moderation, AI, digital IT. And frankly, even CX, I don't think that those are going to slow down on a long-term basis. But yes, in the near-term, we need to factor in what's happening today. And that's what you've seen in our guidance, and we'll come back and talk more about 2023 concurrent with our Q4 earnings.

This does conclude the question and answer session of today's program. I'd like to hand the program back to Mr. Puritt for any further remarks.

Thanks, Jonathan, and thank you all for your questions. As always, we appreciate you taking the time to join us for our quarterly investor calls. Since our inception in 2005, TI has demonstrated its resilience in the face of various challenges, extracting tuition value along the way that has served to guide our company's differentiated approach to service quality excellence. We believe that the ongoing necessity for digital transformation continues to create significant long-term opportunities for TI, and we remain well positioned to capture our fair share, thanks to our 70,000 highly engaged team members and an AI community of more than 1 million talented members, our diverse set of end-to-end digital capabilities and new economy services, our globally scaled and agile delivery model, our relentless focus on efficiency and productivity within our operations and our caring culture that's brought to life through volunteer initiatives like our TELUS Days of Giving here in Central America to name but a few. These foundational elements of our business will also help us continue to execute upon our strategy of profitable growth, driving robust cash flow complemented by thoughtful M&A. Many of you may have heard me share the sentiment about our company on other occasions, but I believe it bears repeating, especially in this current challenging economic cycle within which we're operating. TI's unique combination of people, culture and capabilities and the equal emphasis we place on what we do and how we do it, will continue to support our ability to attract and retain top talent; design, build and deliver best-in-class client outcomes; and ultimately win in the marketplace. And I believe we've only yet just scratched the surface of the possibilities ahead of us. With this thought in mind, Vanessa and I have a very busy conference agenda lined up from now until early December where we hope to connect with many of you in person. Otherwise, our next quarterly investor call will take place in February of 2023. And in the meantime, please keep yourselves and loved ones safe. Thank you, again, and good bye.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.